The equity premium: a puzzle

Abstract

Restrictions that a class of general equilibrium models place upon the average returns of equity and Treasury bills are found to be strongly violated by the U.S. data in the 1889-1978 period. This result is robust o model specification and measurement problems. We conclude that, most likely, an equilibrium odel which is not an Arrow-Debreu economy will be the one that Simultaneously rationalizes both historically observed large average quity return and the small average risk-free return. 1.